They also researched converting
Bishop Estate to a for-
profit corporation

Ousted trustees of the Bishop Estate paid former Gov. John Waihee's law firm thousand of dollars to see if they could move the $6 billion estate's corporate base outside Hawaii and convert the charitable trust to a for-profit entity, according to court papers filed today.

In what critics say is a brazen attempt to circumvent investigations by the Internal Revenue Service and the state attorney general's office, the former board members also directed its outside law firms to lobby Congress to lower the so-called "exit tax" levied on organizations that give up their tax-exempt status.

The moves would have exposed the trust to tens of millions of dollars in annual income taxes that they do not now pay. It also could have placed the estate and its trustees outside the jurisdiction of the IRS, the state probate court and the attorney general's office.

While one former trustee denied that the idea was seriously considered, critics said that discussion of the issue shows that the former board members were placing their personal interests before those of the trust and were violating the spirit of the will of the 115-year-old estate's founder, Princess Bernice Pauahi Bishop.

"The former trustees have turned their backs on the beneficiaries, they've turned their backs on the attorney general and they've turned their backs on the courts. Now they want to turn their backs on the people of Hawaii. It really shows that they want to be accountable to no one but themselves."

The new allegations are detailed in amended lawsuit filed this morning by the Bishop Estate's court-appointed interim board of trustees, who are seeking the permanent removal of former trustees Richard "Dickie" Wong, Henry Peters and Lokelani Lindsey.

The interim trustees -- retired Adm. Robert Kihune, former Iolani School headmaster David Coon, attorney Ronald Libkuman, American Savings Bank executive Constance Lau and retired Honolulu Police Chief Francis Keala -- have alleged that the former trustees jeopardized the estate's tax-exempt status and placed more than $750 million in trust assets at risk by not resigning voluntarily.

Earlier this year, the IRS threatened to revoke the estate's tax-exempt status, saying the former trustees personally benefited from the trust, mismanaged its assets and strayed from the estate's core educational mission.

In their amended complaint, the interim board alleged that the trustees directed their lawyers and consultants to find a way to convert the trust to a for-profit entity and move the estate's domicile, or corporate base, outside of Hawaii.

The moves would have eliminated federal scrutiny over the tax-exempt estate and its five trustees and would have allowed the trustees to increase their focus on the trust's business activities at the expense of the trust's educational responsibilities, the interim board said.

"This effort was a further attempt to preserve excessive compensation at the expense of the trust," the interim board said.

Today's filing did not identify the law firm that conducted that studied the changes but sources close to estate said that most of the work had been conducted by the high-powered Washington D.C. law firm of Verner Liipfert Bernhard McPherson and Hand. Former Gov. Waihee had been a Verner Liipfert partner since 1994.

The interim trustees hinted at Verner Liipfert's involvement when they submitted its list of potential witnesses for the permanent removal trial, which is scheduled to begin on Dec. 13. The court filing listed Waihee and Verner Liipfert staffer Denis Dwyer and said the two would be asked to testify about lobbying and legal work that the Verner Liipfert firm conducted for the trust.

Waihee could not be reached for comment and a spokesman for the law firm had no immediate response.

Peters on Monday acknowledged that the trust had asked Verner Liipfert and the estate's tax consultant PricewaterhouseCoopers L.L.P. to look into converting the trust to a for-profit corporation.

But Peters said the plan -- part of the estate's lobbying efforts on the three-year-old federal intermediate sanctions law that limits trustee pay -- was stopped "in mid-track" since the estate could not avoid paying a hefty exit tax if were to give up its nonprofit status.

Peters said the issue of relocating to the estate's domicile or corporate address was raised last year by Lindsey in her "disgust" over the way the attorney general's office was handling its investigation of the Bishop Estate.

Lindsey was quoted in the June 1998 issue of Honolulu magazine as saying the trustees were considering moving to the mainland because they did not want to be in a place where they were not wanted.

Lindsey could not be reached for immediate comment.

Peters said the idea of moving the estate outside Hawaii was not brought up formally by the board. He added that he was not aware of any work conducted on the subject by Verner Liipfert but noted that previous trustees often discussed the topic prior to his appointment to the estate in 1984.

"The issue was raised way before any of us became trustees and those issues were always looked at and reviewed in the past," said Peters.

"But by the same token, this is home for us. If anything, the attorney general or the governor should move. This is the home of Pauahi and this is her domicile."

The IRS and the attorney general's office have raised concerns about a possible exodus.

In a May 4 letter to the interim board, the head of the IRS's exempt organizations division Marcus Owens said the IRS would move to revoke the trust's tax-exempt status and suspend all negotiations over the estate's tax liabilities if the trust attempted to transfer the estate's assets outside of the IRS's jurisdiction.

Owens -- whose threat prompted Probate Judge Kevin Chang to temporarily remove Wong, Peters, Lindsey and Jervis from their $1 million-a-year posts -- said the estate's lack of internal financial controls and oversight made it possible for the trustees to move estate assets out of the reach of the IRS under the guise of a legitimate business deal.

The attorney general's office voiced similar concerns in the context of a recent trust reorganization. Last November, state attorneys charged that the Bishop Estate may have diverted as much as $1 billion of its assets by transferring its stock holdings in Goldman Sachs Group, Columbia/HCA and Florida-based WCI Limited Partnership to a separate tax-exempt organization.

Judge Chang later approved the controversial reorganization after a court-appointed master found the transfer to be a prudent move.

State high court rejects
appeals by Wong, Peters

By Rick Daysog
Star-Bulletin

The state Supreme Court has rejected appeals by former Bishop Estate trustees Henry Peters and Richard "Dickie" Wong seeking to overturn their temporary removal from $1 million-a-year posts.

Five acting high court justices said yesterday that they lacked the jurisdiction to rule on the former trustees' appeal of Probate Judge Kevin Chang's May 7 order, which removed Wong, Peters, Lokelani Lindsey and Gerard Jervis on an interim basis and appointed five replacement trustees.

The high court justices -- Wendell Huddy, George Masuoka, Ronald Ibarra, Dan Kochi and Shackley Raffetto -- noted that Chang's order was not a final order and that Chang did not give the trustees leave to file an interlocutory appeal.

Glenn Sato, Wong's attorney, said the ruling comes as no surprise. Peters' attorney, Renee Yuen, could not be reached for immediate comment.

The five acting justices are serving as substitutes for the Supreme Court justices who have recused themselves in the case. The high court justices selected the trustees for the Bishop Estate for more than 100 years before ending the practice in December 1997.